The life of luxury

In the week that Britain introduced its largest austerity package for half a century there is evidence that globally luxury spending is rising rapidly.

Consultancy Bain & Co has increased its forecast for this year’s global luxury goods sales growth from 4% to 10%.

That increased optimism is borne out by recent figures from the premium product end of the drinks sector. For instance, LVMH’s sales of wines and spirits rose by 22% in the first nine months of this year, a trend that accelerated in the three months to the end of September, when they grew by 24%. Champagne sales put on 20%.

Inevitably, the rumours that Diageo wants the 66% of Moët Hennessy that it does not own already have resurfaced, this time predicated on the idea that LVMH does not regard alcohol as a core arm of the world’s largest luxury goods group and would be willing to sell it in order to fund a bid for Hermes.

Earlier this month Diageo, the biggest premium drinks group, reported an underlying 5% rise in first quarter sales driven by growing demand in the US and Africa.

This week Pernod Ricard announced that its net sales in the three months to the end of September had risen by an impressive 14% over the same period last year.

The French group’s organic growth was 10% but notably, as with Diageo, it was the premium brands driving the improvement. Pernod Ricard’s 14 premium brands now comprise 73% of its sales.

Martell Cognac saw sales soar by 45% over the third quarter of 2009, and the Champagnes Perrier Jouët and Mumm put on 36% and 13% respectively. At the other end of the market, Jacob’s Creek, which Pernod Ricard is pushing up the price range, increased organic sales by 4% on the back of strong demand in the US, Canada and China.

Echoing the trend in all luxury goods, Pernod Ricard’s sales in Asia and emerging markets put on 25% in the quarter and achieved more than 30% growth in China. Indeed, Bain estimates that China will become the world’s third largest market for luxury goods by 2015.

The buoyant figures have to be compared with last year’s, which was the worst on record for luxury goods globally, the market slumping by 8%. But by the third quarter the industry was picking up, so this year’s results indicate an increasing pace of sales growth and a willingness by customers, especially Asian, to pay for premium products.

According to Bain, however, the very strength of this year’s recovery in luxury and premium priced products will have a dampening effect on the pace of demand growth next year. The expected weakening of the dollar will also help to restrain sales growth to about 5%, the consultancy said.

Not surprisingly, that is the sort of improvement that Pernod RIcard is predicting for its full year to the end of next June. Pierre Pringuet, the chief executive, said that he expected organic profits growth from continuing operations to be “close to 6%”. Diageo has not put a number to its hopes, but it expects to beat the past year’s total, so analysts are pencilling in a similar outcome.

Finance on Friday, 22.10.2010